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Trade finance is nearing a much-needed shakeup

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Trade finance is nearing a much-needed shakeup

The Economist,

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Inefficiencies and opacity plague the financing of global trade. 

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Financing trade is as old as trade itself. But while globalization and supply chains have transformed world commerce, trade finance remains mired in the past. The low-profit, operationally inefficient system, built on trust and wed to outdated practices, is primed for renewal, but the US–China trade war could torpedo its reforms. This expert overview from The Economist, useful for trade specialists and financial professionals, identifies the challenges the sector faces in a time of technological change and rising geopolitical tensions. 

Summary

An archaic system of trade credit still holds sway in today’s global commerce.

Throughout the centuries, exporters have wanted their money when they make a sale, while importers have wanted to pay only after taking delivery of the goods. As a result, financial institutions have easily slipped into the role of intermediaries by providing trade finance. An importer’s bank receives a bill from the exporter and issues a letter of credit to guarantee funds. Using this instrument, the exporter may borrow from its bank with a promise to repay the amount once the importing firm pays its bill. Letters of credit are short-duration loans of four months...

About the Author

The Economist is an independent weekly magazine covering business, foreign affairs, science and technology. 

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